Warning issued on risks of “Carbon Bubble”

April 23, 2013 |

This past week, we have been relaying reports, originally from Bloomberg and now including crowdsourced reaction on the scale-back of the Catchlight Energy project. Reporting has focused on the 5-10 percent return on capital which was expected for the Catchlight drop-in fuels project, using solvent liquefaction, compared to the average 17 percent returns achieved by Chevron from its overall portfolio of capital projects.

A reader writes: The oil majors have not built a new refinery in over thirty years. Conoco basically just split their company in half, separating the low profitability (refining) business from the high profitability (exploration and production) business.  As I understand it, they had been looking to sell the refining business for years, couldn’t find a buyer, so in essence they gave it to their shareholders by splitting the stock.

In other news, we reported yesterday that Chevron’s overall capital budget for 2013 totals $36.7 billion, of which more than $33 billion was devoted to “upstream” exploration and production.

Capital-Flows

But new material from Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment is suggesting that 60-80 percent of existing oil and gas reserves represent unburnable carbon based on existing global carbon targets — and that, accordingly, investments in new carbon-recovering oil & gas projects represent “stranded assets” that could only be made whole by abandoning existing carbon targets altogether.

The report contends: “company valuation and credit ratings methodologies do not typically inform investors about their exposure to these stranded assets, despite these reserves supporting share value of $4trillion in 2012 and servicing $1.27trillion in outstanding corporate debt over the same period.

“The total coal, oil and gas reserves,” the researchers report, “listed on the world’s stock exchanges equals 762GtCO2 – approximately a quarter of the world’s total reserves; If you apply the same proportion to the global carbon budgets to have an 80% chance of limiting global warming to 2°C, their allocation of the carbon budget is between 125GtCO2 and 225GtCO2, illustrating the scale of ‘unburnable carbon’”

Of bubbles, Wikipedia writes: “The one true constant with all bubbles is that they create excess demand and production. Once the bubble deflates, which it always does, a contraction or consolidation has to occur to alleviate the excess. Two perfect examples are the Dot Com Bubble and the current Housing Bubble. In both cases there were huge consolidations, bankruptcies, and deterioration of asset values.”

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